If Peter Peterson Sold Government Bonds to Pay for His "Campaign to Fix the Debt" Did He Add to the Deficit?

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Thursday, 29 November 2012 10:57

According to USA Today, he did. USA Today's editors are hopping mad because people like Senator Dick Durbin keep reminding them of the law which says that Social Security cannot contribute to the deficit.

Under the law, the Social Security program is financed exclusively by its own payroll tax. (The exception is the last two years where general revenue was added to make up for the revenue lost as a result of the payroll tax holiday.) It can only spend money raised through this tax either in the current year or from the interest and principal from government bonds purchased in prior years.

This means that Social Security can never add to the deficit, except in the same way that Peter Peterson sells his government bonds. When Peterson sells his bonds, the government must either cut spending, raise taxes or borrow the money from someone else. Since the actors in financial markets are more realistic than the frantic Washington types who are working themselves into hysterics about the deficit, the government will have no problem borrowing from someone else either when Peter Peterson sells his bonds or Social Security cashes in some of its bonds.

Anyhow, give USA Today and the other deficit fear mongers a gigantic "F" for flunking reading comprehension. Unless Congress changes the law, Social Security cannot contribute to the deficit, got it boys and girls?

btw, USA Today also has another bizarre invention in this editorial. It tells readers:

"From 1983 through 2009, Social Security collected more in taxes than it paid in benefits. The surpluses were supposed to go into the trust fund, protected by what Al Gore called a "lockbox" when he ran for president in 2000. Alas, there is no lockbox and never has been; the money came into the Treasury and went out just as quickly, spent on the government's day-to-day expenses and replaced by IOUs in a file cabinet."

Huh? What on earth is the paper talking about? The surplus did go into the trust fund, buying U.S. government bonds, which the paper bizarrely calls IOUs. This is exactly what the law required. It's not clear where USA Today thinks government bonds should be kept, but apparently not in a filing cabinet.

Anyhow Al Gore did have a specific proposal for the treatment of the surplus. It's not clear that he would have implemented it if elected (it would have meant running large budget surpluses even as the U.S. economy sank into recession in 2001. That is unconscionably stupid economic policy), but it certainly is not what is required under the law, even if folks at USA Today really liked it.

I'm going off to see what the yield is on GE and Verizon IOUs.

 

Addendum:

Sorry folks, I didn't mean to be overly obscure on the Peterson selling his bonds reference. He could have bonds that actually come due that he will cash in and the Treasury would have to roll over this debt, as it does all the time, as some folks have pointed out. But I was actually thinking of the more typical case where he dumps $30 million of bonds in the market. In that case, Peterson was the person who was originally lending money to the U.S. government, but then another person (the buyer) will then be holding the loan. That is what I meant that we would need someone else to borrow from. Of course on the bonds he holds Peterson is obviously the person at risk (he needs to find someone), but as a practical matter, since we are issuing new bonds all the time, it has the same effect on the market if Peterson dumps his $30 million as if the government has to issue another $30 million in new bonds.